12.12.17 Mechanic's Liens

Mechanic’s Lien Coverage Requires Underwriter Approval.

Priority

Can the Construction Loan have initial priority over mechanic's liens?

A construction loan mortgage may obtain initial priority over mechanic's liens if the mortgage is properly filed before commencement of construction or furnishing of materials or professional services related to construction. RCW 60.04.061

Pursuant to RCW 60.04.031(5), every potential lien claimant providing professional services to a site where no improvement has commenced and the professional services are not visible from an inspection of real property may record a notice in the real property records a Notice of Furnishing Professional Services.  If the provider of professional services does not record the required notice, their lien is rendered subordinate to that of a subsequent mortgagee.  However, if said mortgagee has actual knowledge of such services, the provider shall enjoy a priority lien status over the mortgagee, despite the failure to record notice.  Zervas Grp. Architects, PS v. Bay View Tower, LLC, 161 Wn. App. 322 (Wash. Ct. App. 2011)

Will initial priority as to future disbursements be retained only if certain procedures are followed?

Even if the construction loan mortgage has obtained initial priority over mechanic's liens, future disbursements might be jeopardized unless certain procedures are followed. According to RCW 60.04.221, a construction lender must follow certain procedures regarding notice by potential lien claimants unless there is a payment bond of at least 50% of the amount of the construction loan.

If priority is lost, can it be regained?

Priority status is only as to the extent of the work done or materials furnished by each individual lien claimant. Future lien claimants do not relate back to other lien claimants who furnished materials or commenced work upon the property before the construction loan was recorded. If a lien claimant does work on the property and executes a lien waiver, then at a later date provides additional work or services for the project, their priority status may relate back to their original start date, despite the execution of a lien waiver.  A.A.R. Testing Lab. v. New Hope Church, 112 Wn. App. 442 (Wash. Ct. App. 2002)


Due to the above referenced case law, it is appropriate to obtain subordination agreements in addition to lien waivers from all lien claimants who provided work, materials or professional services to the project prior to the recording of the construction loan Deed of Trust.

Is there a difference between on-site and off-site work?

There is no statutory difference between on-site and off-site work.

Is priority the same for all contractors and subcontractors on the same project?

No, priority is not the same for all contractors and subcontractors on the same project. According to RCW 60.04.181, the court determines the priority among competing mechanic's liens by the following order:

1. labor liens
2. contributions owed to employee benefit plans
3. furnishing of materials, supplies or equipment
4. subcontractors
5. general contractors and professional services such as engineers, architects, etc.

Time Limits

What are the time periods for recording lien claims by original contractors and subcontractors?

Original contractors and subcontractors must file their lien claim within 90 days after completion of work or furnishing of materials.

After what period of time can you waive a mechanic's liens if no suit is filed?

An action to enforce the lien claim must be filed within 8 months after the lien claim was filed. RCW 60.04.141

Removing or Waiving Liens

Is there a statutory procedure for affidavits of completion or notices of completion?

No.

Can a statutory bond terminate the mechanic's liens as an encumbrance on the title?

A statutory bond can terminate the mechanic's lien(s) as an encumbrance on title upon compliance with RCW 60.04.161. The bond shall contain a description of the claim of lien and real property involved, and be in an amount equal to the greater of five thousand dollars or two times the amount of the lien claimed if it is ten thousand dollars or less, and in an amount equal to or greater than one and one-half times the amount of the lien if it is in excess of ten thousand dollars. If the claim of lien affects more than one parcel of real property and is segregated to each parcel, the bond may be segregated the same as in the claim of lien. A separate bond shall be required for each claim of lien made by separate claimants. However, a single bond may be used to guarantee payment of amounts claimed by more than one claim of lien by a single claimant so long as the amount of the bond meets the requirements of this section as applied to the aggregate sum of all claims by such claimant. The condition of the bond shall be to guarantee payment of any judgment upon the lien in favor of the lien claimant entered in any action to recover the amount claimed in a claim of lien, or on the claim asserted in the claim of lien. The effect of recording a bond shall be to release the real property described in the notice of claim of lien from the lien and any action brought to recover the amount claimed.

Can the original, general, or subcontractors by contract or waiver agreement subordinate or waive mechanic's liens by general contractor and/or subcontractors?

According to RCW 60.04.031, a general contractor or subcontractor may subordinate or waive their right to a mechanic's lien.

Can a bona fide purchaser or bona fide lender take free of mechanic's liens later filed for earlier work?

No.

Title Company Requirements

What are the customary requirements for issuing Loan Policies on construction loan mortgages?

All loan policies issued for construction loan mortgages wherein mechanic’s lien coverage is provided require approval from a Senior Underwriter.  A mechanic’s lien indemnity must be executed by the general contractor, developer and/or property owner.

An inspection of the property must be completed in order to determine whether there is any visible evidence of work on the property or the delivery of materials.

In the event you are aware of work completed, materials delivered or professional services provided, lien waivers and subordination agreements must be obtained from all contractors and sub-contractors who provided such work, materials or services.  

Regardless of visible evidence of work, the following exception must appear on all preliminary title commitments associated with insuring new construction:

               “Rights, if any, of parties providing off-site professional services.”

This exception can be removed with the execution of an affidavit from the same individual(s) who execute the mechanic’s lien indemnity.  The affidavit must state that there have been no professional services provided in association with this project, including, but not limited to architectural services, surveying services or engineering services.  If such services have been provided, a list of all individuals or entities that have provided services as well as the type of service must be identified.  Evidence of payment, lien waivers and subordination agreements must be obtained from all parties listed on the affidavit.

A pending disbursement clause must be included on the commitment and policy if the policy is to be issued during construction.

Any Future Advance Endorsement must contain a mechanic’s lien exception.

Is it customary to add a "pending disbursement" clause or mechanic's liens exception in the Loan Policy insuring a construction loan mortgage?

Yes, either a pending disbursement clause or a mechanic’s lien exception in the loan policy insuring a construction loan mortgage is required.  Consult your local underwriter to determine which pending disbursement clause is appropriate for your transaction.

Also subject to any bulletins relating to mechanic’s liens.